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What Is a Captive Bank?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 September 2016
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Captive banks are financial institutions that are partially or wholly owned by another entity, and are normally created for the exclusive use of the firm or firms that own the bank. It is not unusual for a captive bank to serve as a tax haven for the owners. Depending on the structure of the captive bank, the owners may allow a small number of clients to also make use of the bank’s services, with those clients usually having some sort of business relationship with the owning entity or entities.

The scope of services offered by a captive bank are usually very similar to those offered by other banking institutions. Just as commercial banks may extend different types of loans as part of a merchant banking strategy, the captive financial institution will offer the same. Even basic banking services such as checking and savings accounts, loans for cars and residential properties, and other offerings are found with a captive bank. The difference is that the services are typically available to only a select few rather than open to the public at large.

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One of the main advantages of a captive bank is the ability to create tax benefits for the owners of the institution and to a lesser degree for any others who are allowed to obtain services from the bank. In many nations, the financial rules that apply to other types of banks do not apply to a captive bank. This means that the bank can be chartered with lower requirements in terms of capital and backing, and also have more control over how the business is conducted. The reason for the relaxed laws as they pertain to this type of bank is due to the fact that services are only offered to a relatively small group, whereas other banking institutions are free to solicit customers from all walks of life.

One of the benefits of a captive bank is the ability to arrange finances among the small group of participants in ways that are not usually possible with other models. While this arrangement can work to the advantage of those who utilize the bank’s services, it is important to note that the protections and guarantees associated with other types of banks may or may not be provided to the customers of a captive bank. For this reason, participating in this type of banking arrangement requires careful scrutiny of how the bank will be organized and how much risk is involved in that participation.

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